EMD Loss Calculation
Loss calculation in cases involving exempt market products
Overview
In general, where unsuitable investments have been recommended the goal of our recommendation is to put the investor in the place they would have been had the unsuitable recommendation not been made, which is the same as the approach to damages generally taken by the courts.
In cases involving exempt market products, we will generally follow our standard loss calculation methodology, with modifications that reflect the illiquid nature of some exempt market investments. You can find a simplified description of our standard loss calculation methodology here, or a more detailed description from our 2011 public consultation paper here.
To determine an investor’s losses, we need to be able to calculate the investor’s actual investment performance. For cases where the investments that have been unsuitably recommended are exempt market products, which are not traded on public markets, our loss calculation methodology will depend on whether a current or ending value can be determined for the security.
Working with firms to understand valuation
We will work closely with the firm to understand the current value of any exempt market securities at issue in a case and will consider any evidence that they provide or that we can find about this. Often there is reasonable evidence that allows us to at least estimate an ending value. When an ending value can be reasonably determined, we follow our general loss calculation methodology using that ending value.
Where no valuation is possible
For cases involving unsuitably sold securities that may have value but where there is insufficient evidence available about the value of the security, it is not possible to conduct a loss calculation that takes into account the investor’s actual losses (since this depends on the current value of their investments).
In these cases, we follow our standard loss calculation processes but assign an ending value of zero to the security and calculate the losses on that basis. Since the amount of the recommendation calculated using this methodology could result in double recovery to the investor if there is any residual value in the security, in these cases we generally recommend that the investor transfer the security to the firm as part of the settlement.
In most cases, EMD firms have accepted our recommendations made on this basis, but on occasion (in one or two cases per year), firms will tell us that receiving securities from investors as part of a settlement is not acceptable to them. In these cases, we have worked with the firm and investor to find a mutually acceptable resolution.